The clock is ticking for public sector contractors as changes to IR35 come into force. IR35 - known as intermediaries legislation - affects workers in the public sector who provide services through personal services company (PSC) and tests whether their pay should be treated as corporate or employment income.
New rules being introduced in April affect who is responsible for tax and insurance liabilities and have left some contractors scratching their heads as to whether they are inside or outside of IR35.
The good news is the government has published an online tool to determine IR35 status and further assistance came when Randstad hosted a webinar on the changes.
Why IR35?
The 1990s saw a rise in IT contractors who were “leaving work on Friday evening as employees only to return to the same office on Monday morning as a contractor”.
IR35 was designed to assess who should legitimately be paid gross and whose pay should have tax and national insurance deducted.
Announced in a 1999 HMRC press release, the law was clear from the outset what it intended to do: “But for the existence of the intermediary, would the worker be classed as an employee of the client?”
Who’s affected?
As mentioned above, the changes affect public sector contractors who provide their services through a PSC. The law applies to public sector organisations as defined by the Freedom of Information Act and last minute changes expanded the scope to include the House of Commons, House of Lords and devolved legislatures in Wales and Northern Ireland.
Who’s responsible for deductions?
The fee payer will be responsible for making the correct deductions based on information provided by the end-user as to the IR35 status of PSCs providing services to public sector organisations. This means making the correct tax and national insurance deductions and submitting Real time Information to HMRC.
Determining factors.
-
Obliged to work vs freedom to work - One of the determining factors is the employment status of the contractor and whether a “mutuality of obligation” exists or if the worker has “freedom”.
It’s complicated but what this basically means is is the employer obliged to provide the employee with work and is the employee obliged to accept work?
Or, on the other hand, does the contractor have the freedom over how they complete the work? -
Substitution - Can the PSC provide a substitute worker? If not then the engagement could be deemed to be a personal service and as a result be deemed inside IR35.
-
‘Part and Parcel’ - To what extent is the contractor part of the organisation? For example, do they receive employee benefits?
-
Own equipment - Who provides the equipment required to complete the work?
-
Financial risk - If all financial risk lies with the employer then the engagement is likely to be classed as inside IR35.
